3. The standard deviation of the market-index portfolio is 15%. Stock A has a beta of 2.2 and a residual

standard deviation of 25%.

A. What would make for a larger increase in the stock's variance: an increase of 0.2 in its beta or an

increase of 3.84% (from 30% to 33.84%) in its residual standard deviation?

B. An investor who currently holds the market-index portfolio decides to reduce the portfolio

allocation to the market index to 90% and to invest 10% in stock A. Which of the changes in (A)

will have a greater impact on the portfolio's standard deviation?